Korea news drags dollar lower; Wall St focuses on possible trade war

NEW YORK (Reuters) - The U.S. dollar touched a two-week low on Tuesday as traders bet on riskier currencies on new signs of a thaw in relations between North and South Korea and the North’s willingness to discuss denuclearization with the United States.

Traders work on the floor of the New York Stock Exchange shortly after the opening bell in New York, U.S., March 1, 2018. REUTERS/Lucas Jackson

North and South Korea, still technically at war since 1953 but with tensions having eased since the Winter Olympics hosted by the South last month, will hold their first summit in more than a decade next month, South Korea said on Tuesday. It also said the North would suspend nuclear tests while proposed talks with the United States on denuclearization were under way.

But the U.S. stock market focused on concerns over a possible trade war after U.S. President Donald Trump announced planned tariffs on imports of steel and aluminum last week. The major indexes eked out small gains on Tuesday as investors weighed mixed signals from Washington.

Republican lawmakers stepped up calls for Trump to pull back from the tariffs as key trading partner Mexico rejected a bid by Washington to drive a wedge between it and Canada in talks to renegotiate the North American Free Trade Agreement, while Trump reiterated his plan to go ahead with the tariffs.

The U.S. dollar, seen as a safe haven against risk in recent months, fell further after news of the North and South Korea talks as investors bought the Australian and New Zealand dollars and some emerging market currencies.

“It’s too early to wholeheartedly buy these currencies because of the chances of escalating trade tension between the U.S. and its trading partners,” said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

The dollar index .DXY, which tracks the greenback against a basket of other major currencies, fell 0.56 percent, up 0.04 percent toafter touching its lowest level since Feb. 20. The euro EUR= rose 0.57 percent to $1.2405.

The Japanese yen JPY= weakened 0.02 percent versus the greenback, to 106.16 per dollar, while sterling GBP= was at $1.3888, up 0.02 percent.

Traders await clues on monetary policy direction when the European Central Bank and the Bank of Japan hold policy meetings on Thursday and Friday.

“The strength of the euro is starting to put pressure on the euro-zone economy. This is putting pressure on the ECB,” said Jack McIntyre, portfolio manager at Brandywine Global in Philadelphia.

Stocks edged higher in Europe, as well as in the United States, while a global gauge of major equity markets was boosted largely by gains in Asia after stocks there were battered Monday on concerns over a global trade war. Those worries eased during U.S. market hours on Monday, so Asian equities were catching up.

On Wall Street, the S&P 500 rose for a third straight session, though it was unclear what Trump’s final decision on tariffs would be.

“The market is basically grasping for straws around what the (tariff) policy is going to be. Based on the action we saw today it’s hoping it doesn’t turn into a trade war,” said Jonathan Mackay, investment strategist at Schroders Investment Management in New York, adding that the news out of the Korean peninsula “helps around the margin.”

U.S. Treasury yields were little changed in choppy trading as optimism grew that Trump may back down from his proposed tariffs, even though he said he would not.

Trump’s suggestion that Canada and Mexico could be exempted if a new North American Free Trade Agreement was reached drove market participants to see his tariff plan as leverage in NAFTA talks.

“It does seem as though Trump has laid out the fact that he’s using these tariffs as a negotiating tactic,” said Gennadiy Goldberg, an interest rate strategist at TD Securities in New York.

Benchmark 10-year U.S. Treasury notes US10YT=RR last fell 2/32 in price to yield 2.8863 percent, from 2.879 percent late on Monday.

The 30-year bond US30YT=RR last fell 2/32 in price to yield 3.1531 percent, from 3.151 percent late on Monday.

Treasuries prices were also pressured by strong demand for CVS Health’s $40 billion M&A bond, which gave a shot of confidence to the U.S. high-grade bond market Tuesday after a recent bout of volatility in the usually rock-solid asset class.

U.S. crude CLcv1 fell 0.19 percent to $62.45 per barrel and Brent LCOcv1 was last at $65.66, up 0.18 percent.

U.S. crude fell in post-settlement trading after crude inventories rose by 5.7 million barrels compared with analysts’ expectations for an increase of 2.7 million barrels, data from the American Petroleum Institute showed.up 0.03 percent